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IMF, World Bank warn against growth-stifling austerity

by Elaine Kurtenbach, The Associated Press

Oct 12, 2012

TOKYO – Countries should not sacrifice growth for the sake of austerity, the head of the International Monetary Fund told global financial leaders Friday, urging that the pace of government debt reduction be tempered by spending to help get the unemployed back to work.

Balancing those sometimes competing priorities is the central puzzle facing policymakers as the world economy slows further, even in dynamic Asia, IMF chief Christine Lagarde told finance leaders at the IMF and World Bank annual meeting in Tokyo.

Lagarde said she was “desperately optimistic” on prospects for a global recovery, while warning against backsliding on reforms needed to prevent future financial crises.

“The first priority, clearly, is to get beyond the crisis, and restore growth, especially to end the scourge of unemployment,” Lagarde said.

Greece, Spain and other European countries labouring under massive debts have slashed spending and raised taxes, seeking to restore confidence in their public finances and qualify for emergency financing. The economies of financially healthier European countries, such as Germany and Finland, face a potential blow to growth if those troubled economies fail to get their financial houses in order. At the same time, the recovery of the 17-nation grouping that uses the euro could founder if tax increases and spending cuts bite too deeply.

While there seems to be a wide consensus on long-term strategies for reform, there is less agreement how painful such policies should be in the near-term given the persistent risk of recession and surging unemployment.

“One lesson though is clear from history,” Lagarde said. “Reducing public debt is incredibly difficult without growth. High debt, in turn, makes it harder to get growth, so it’s a very narrow path to be taken.”

“It’s probably a long path, and one for which there is probably no shortcut, either. It’s a path that needs to be taken,” she said.

Lagarde said monetary policies must encourage banks to lend, while spending cuts are adjusted to the “right pace.” Debts must be brought down in the medium term, and structural reforms are needed to sustain growth in the long term, she said.

“That’s the package that is needed,” Lagarde said. “Let us not delude ourselves. Without growth, the future of the global economy is in jeopardy.”

“It’s a marathon, not a sprint. It could take years,” Lagarde said in an on-camera debate hosted by the British Broadcasting Corp. where she good naturedly traded jibes with German Finance Minister Wolfgang Schauble.

“When you are running the 42 kilometres of a marathon, you can’t just stop and turn around and go the other way,” Schauble retorted, accusing those who favour going easy on debt reduction of backpedaling on their commitments.

“Increasing public debt does not enhance growth, it damages growth,” he said.

Lagarde contended that it was not an issue of reversing commitments but of adjusting the pace to suit each country’s unique situation.

The IMF has scaled back its global growth forecast for 2012 to 3.3 per cent from 3.5 per cent, and has warned that even its dimmer outlook might prove too optimistic if Europe and the United States fail to resolve their crises.

On Friday, the fund said economic growth in the Asia-Pacific region slowed to 5.5 per cent in January-June. That is well above the global average, but the lowest for the region since the financial crisis in 2008. The slowdown is largely because of sluggishness in Europe and the U.S. It also noted weakness in China and India, whose dynamism had helped counter weakness elsewhere.

“The global recovery is still too weak. Job prospects for untold millions are still too scarce, and the gap between the rich and the poor is still way too big,” Lagarde said.

Europe’s darkening economic outlook is drawing calls for more public support even from austerity champion Chancellor Angela Merkel. She said Thursday it was incumbent on Germany, whose 0.3 per cent growth in the second quarter helped offset a 0.2 per cent contraction among the 17 nation grouping that uses the euro, to “do things to stimulate the European economy.”

Lagarde has urged that European creditors give Greece an extra two years to meet austerity targets required to get and continue receiving loans, after nearly defaulting on its mountain of debt.

Such accommodations would just confuse markets, increasing uncertainty, Schauble said.

In Japan, both Lagarde and Jim Yong Kim, president of the World Bank, have stressed that without greater equity and equality, growth will be unsustainable.

The IMF’s mission is threefold: economic surveillance, advice and providing temporary funding, while the World Bank’s mission is to fight poverty. The bank uses funds from donor members and proceeds from bond sales to provide low-interest loans to developing countries.

During the meetings, Kim has spoken often about the need to ensure food security for the poor at a time when spikes in prices have become routine.

To fortify a “safety net” for crises while supporting improvements to make farming more efficient and sustainable, ministers pledged new funds for the Global Agriculture and Food Security Program, a trust fund set up in 2010.

Japan and South Korea each promised $30 million in new funding, while the U.S. pledged to contribute an extra $1 for every $2 contributed by other donors, up to a total amount of $475 million. Including those new funds, the fund has financial support of $1.3 billion.

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